A Not-So-New Direction for Tax Policy

During the past eight years, tax policy has been something of a political hot potato in the United States. Although President Bush accomplished only a few major domestic policy objectives in his two terms, the first and perhaps most notable was an across‐the‐board reduction in marginal tax rates, which should perhaps serve as a warning to those who draw too many conclusions from a president’s early accomplishments.

Throughout the past eight years, opposition to the Bush tax cuts on high earners has practically been a membership requirement of the Democratic Party. Since 2004, every major Democratic presidential candidate, including our new president, has called for their repeal. To academics who study tax policy, the angry partisan tone of the debate has been highly ironic. As illustrated in Auerbach and Hassett (2005), among academics there is fairly broad agreement concerning the optimal design of tax policy.

Given the sweeping Democratic victory in November 2008, one might have expected the Bush tax reductions to have been quickly repealed. Circumstances, however, conspired to save the tax cuts, for a brief time at least. What is already the worst recession in postwar U.S. history has focused the attention of lawmakers on economic stimulus, with an ambitious plan becoming law.

The stimulus “distraction,” however, has set the United States up for a truly momentous year in the history of tax policy. In 2010, virtually all of the Bush tax cuts will expire. Many of the expiring provisions are popular with Democrats and Republicans alike, and, hence, an important tax bill will inevitably emerge. Will that bill be a simple extension of the more‐ popular preexisting policies or a reform that is guided by the academic consensus? The answer will depend on our new president’s economic philosophy, which we can discover by drawing on the evidence from his first hundred days in office.

Any historical picture of the economic philosophy that animates a president must refer to changes he accomplished and changes he attempted but failed to accomplish. In the case of President Obama, we have already, in his first hundred days, a significant accomplishment to evaluate, as well as a fairly detailed view of his plans for the future. In the next section, I discuss the recent stimulus bill. In the subsequent section I turn to the president’s budget, which details many of his plans for the future. I then discuss the tax panel that President Obama has assembled and the likely substantive effects of the charge that the panel has received. The final section is a conclusion. . . .